After Tax Mortgage Rate Comparison

With the historical low mortgage rates hovering around 2.59% for a five year fixed term mortgage, it can be easy to forget and it is easier to justify not making extra payments on your mortgage.  Depending on your financial situation it could be a good idea to just pay your monthly mortgage payment.
    If you have any other debt, then I would avoid paying down your mortgage using your prepayment privileges.  If you are just barely getting by, then it would also be a good idea to stay as liquid as possible and keep the extra cash on hand.  The last reason not to pay down your mortgage early would be that you can significantly outperform the after tax interest costs of your mortgage.
    Depending on your salary and the province in which you live in, you would need to earn 3.2% to 6.3% on your investments to do better than the risk free investment of paying down your mortgage with a 2.59% interest rate.


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Credit Card Nerd Math

A dollar saved is not a dollar earned, unless of course you pay no income taxes.  Depending on the province you live in and your salary, a dollar earned can be worth less than $0.50.
    In B.C. someone earning $35,000 in a year will have a 20.06% combined marginal income tax rate.  A dollar earned will be worth 80 cents.  A dollar saved will be the same as earning $1.25.  So to pay a 2.59% interest rate, you will need to earn 3.2%.  The math works like this; 2.59% x 1.25 = 3.2%.  The risk free investment of making extra payments on your mortgage would be equivalent of earning 3.2% in a GIC.
    An Albertan with a $50,000 annual salary will have a marginal tax rate of 30.5%.  Each additional dollar earned will net them 69.5 cents.  To pay a mortgage with a 2.59% interest rate they would need to earn an equivalent 3.7%.  The numbers work like this; $1/0.695 x 2.59% = 3.7%.  The risk free investment of paying down your mortgage is the same as earning 3.7%.
    In Manitoba you will lose 37.9 cents for every additional dollar that you earn if you are making $70,000 in a year.  A dollar saved here will be the same as earning $1.61.  Saving by paying additional payments on your 2.59% mortgage will be the same as earning 4.2% (1.61 x 2.59% = 4.2%) and it is guaranteed.  You will save the most if you reduce your costs and put your savings into your mortgage payment in the first few years of your mortgage.  A $2,000 reduction in your mortgage can reduce your mortgage principal over time by $3,994, which is almost the same as getting a 100% after tax guaranteed return over time.  $2,000 x (1.025924) = $3694.46
    The biggest savings comes from the top marginal tax rate in New Brunswick.  Here you will need to earn 6.3% on your investments to beat the after tax returns of making additional payments on your mortgage.
    Below we have a chart with five different salaries in the ten provinces.  The rates are what a GIC would have to pay in order for you to breakeven on not paying down your 2.59% mortgage in your province.



Equivalent GIC Rate Needed to Breakeven on a 2.59% Mortgage Rate

Province 

$35K

$50K

$70K

$95K

$150K

BC

3.2%

3.6%

3.6%

4.2%

4.6%

AB

3.5%

3.7%

3.7%

4%

4.5%

SK

3.5%

3.9%

3.9%

4.2%

4.6%

MB

3.5%

3.9%

4.2%

4.6%

4.8%

ON

3.3%

3.7%

3.7%

4.6%

5.4%

QC

3.2%

4.1%

4.1%

4.8%

5.2%

NB

3.4%

4%

4%

4.5%

5.2%

NS

3.7%

4%

4.1%

4.6%

5.2%

NL

3.4%

3.9%

3.9%

4.3%

4.6%

PE

3.6%

3.9%

4.1%

4.5%

4.9%



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A Wake Up Call

With a 2.59% interest rate on your mortgage it can seem like a wasted effort on trying to reduce your mortgage principal.  It shouldn't be hard to earn a 2.59% return on an investment.  A 4% compounded risk free return though, is something that might get people talking.
    I don't know if it is a newly landed immigrant thing, but every coworker that I know that immigrated here, really went to war on their mortgage and never spent more than two years renting.  They didn't come here with much, but their kill the mortgage debt attitude propelled their net worth past most of my coworkers in a relatively short period of time.